Submission To The Estate Agents Council Regarding The Conduct Of Private Auctions
OPINIONby Peter Mericka B.A., LL.B
Real Estate Consumer Advocate
Real Estate Lawyer
Qualified Practising Conveyancer Victoria
Director Lawyers Real Estate Pty Ltd
Introduction
In its Estate Agents Council Bulletin No. 57 – April/May 2006 the Estate Agents Council has called for submissions regarding the conduct of private auctions including “dummy bidding”, as follows:
“The Estate Agents Council has been asked to advise the Minister for Consumer Affairs about the conduct of private auctions, including “dummy bidding” in the real estate industry. The protection given to prospective buyers under Section 37 of the Sale of Land Act 1962 (SL Act) is not available at an auction which is not publicly advertised and where bidding takes place out of the public domain as defined by Section 37 of the SL Act as a “public auction”.
The Council is keen to hear from interested parties about the practice of conducting “private auctions”. The objective of the Council’s inquiries is to establish the industry’s perspective on whether the practice of “dummy bidding” at private auctions, in terms of magnitude and implications for consumers, constitutes a problem, with a view to redressing it.”
The introduction of Dummy Bidding legislation through amendments to the SL Act was always doomed to fail. Crimes of deception are an essential part of the real estate industry in its present form, and this state of affairs will not change unless and until fundamental change is forced upon the industry.
Our firm acts for hundreds of vendors and purchasers of real estate each year. It is our experience that estate agents interpose themselves between the vendor and the purchaser, and the parties’ representatives, in order to protect their own interests.
See the following pages of our website for some recent examples of inappropriate estate agent interference in the sale process:
The “Private Auction” – A Haven For The Dreaded Dummy Bid
Why Estate Agents Should NEVER Handle Contracts
Rebate Was Really A Penalty!
Estate Agents & The “C” Word
BEWARE – Estate Agents Who Act As Lawyers
Real Estate Documents – Don’t Be A Goose!
The Latest In Real Estate Deception
“Private Auctions” are a common feature of real estate transactions in Victoria, and are a popular method of consumer control. The “Private Auction” is a particularly effective vehicle for criminal deception in real estate sale transactions.
We submit that the only way to deal with criminal deception in real estate is to prevent real estate agents from taking control of the sale process away from the consumer.
What Is A Private Auction?
We submit that a “Private Auction” is:
Any real estate sale transaction where:
1. The purchaser’s offer is rejected by, or on behalf of, the vendor;
2. The vendor does not make a counter-offer when rejecting the offer;
3. The purchaser is invited to submit a further offer; and
4. The vendor does not state precisely the price, and the terms on which a further offer would be accepted.
The Private Auction gives the vendor or the estate agent or both, the opportunity to make false claims of competing offers. This is similar to the concept of the “dummy bid” (discussed below).
The following are examples of “Private Auctions”:
Example 1:
An intending purchaser attends at the office of the estate agent and submits a written offer to purchase a property. The estate agent advises the purchaser that there is already “a higher offer on the table” and invites the purchaser to increase her offer. The purchaser is told that the agent cannot divulge details of the other offer for “ethical” reasons, and will not tell the intending purchaser what the vendor is prepared to accept.
Example 2:
The estate agent calls the intending purchaser by telephone and advises that her offer has been put to the vendor, but adds, “You’re nearly there, you just have to come up a bit and you’ll get the property.” (This statement is effectively a “vendor bid”, made with or without the vendor’s knowledge.)
The Private Auction is not confined to price. It may also involve false claims regarding terms and conditions.
Example 1:
The purchaser’s offer includes a special condition stating that the sale is subject to a building inspection “to the purchaser’s satisfaction”. The estate agent informs the purchaser that this is unacceptable, and that the offer must be amended so that the purchaser can end the contract only if the inspection reveals a “major structural defect”.
Example 2:
The purchaser’s offer is conditional upon finance being approved with 14 days of the day of sale. The estate agent falsely claims that a similar but unconditional offer is “on the table”.
A number of Private Auction “systems” are marketed to estate agents by Pilling Systems (see www.pillingsystems.com.au). It is important to note that these systems are marketed, not to consumers, but to estate agents.
The Private Auction is regularly used as a vehicle for “dummy bidding”.
What Is Dummy Bidding?
Dummy Bidding is a euphemistic term used to describe the criminal offence of Obtaining Financial Advantage By Deception (OFABD).
Dummy Bidding Legislation
The introduction of dummy bidding legislation in Victoria was quick but ill-informed. It appears that regulators and legislators were unaware that dummy bidding is, and always has been, a serious criminal offence.
The offence is found at Section 82 of the Crimes Act 1958 (CA Act), which states:
Obtaining financial advantage by deception
82. Obtaining financial advantage by deception
(1) A person who by any deception dishonestly obtains for himself or another any financial advantage is guilty of an indictable offence and liable to level 5 imprisonment (10 years maximum).
(2) For purposes of this section “deception” has the same meaning as in section 81.
Section 81(4)(a) states:
(4) For the purposes of this section, “deception”-
(a) means any deception (whether deliberate or reckless) by words or conduct as to fact or as to law, including a deception as to the present intentions of the person using the deception or any other person; and…
The evidentiary problems associated with criminal deception mean that few offenders are ever caught and prosecuted.
Industry regulators have failed to recognise that deceptive behaviour is institutionalised, and regarded as “normal” practice. (One is reminded of the assertions made by the tobacco industry that “smoking is not addictive”, when recalling the attempts by the real estate industry and the REIV to justify the practice of dummy bidding prior to the decision to amend the SL Act. Suggestions that deceptive practices were acceptable in order to take bids to the reserve price were heard from many quarters.)
Amendments to the Sale of Land Act 1962
As the result of a public outcry over dummy bidding, new legislation was introduced by way of an amendment to the SL Act. Of course, an easier option would have been to utilise the existing criminal deception provisions of the CA Act.
The amendments to the SL Act did little more than create confusion regarding deceptions committed in the context of an auction.
In addition, consumers found themselves in the firing line, as it was now an offence for a consumer to disrupt an auction (we are aware that some estate agents have used this to good effect in stopping consumers from asking embarrassing questions at auction).
Effects of the “New” Legislation
The new legislation did little more than “water down” the offence of criminal deception when the deception takes place in the context of a public auction:
Example:
An auctioneer, who dishonestly pretends to have received a bid in order to gain for himself or for the vendor a financial advantage, faces 5 years in prison under the CA Act.
However, under Division 4 of the SL Act, this criminal conduct now attracts a maximum penalty of 240 penalty units.
To the average consumer, it would appear that the purpose of the “Dummy Bidding” legislation was to reduce what was previously an indictable criminal offence under the CA Act, to a lesser summary offence under the SL Act.
Serious Criminal Deception & “Less Serious” Criminal Deception?
The dummy bidding legislation now leaves us with two forms of criminal deception – a serious form of criminal deception (committed when the deception takes place other than in the context of a public auction for real estate), and a less serious form (committed when the deception is used to affect the outcome of a public auction).
Example 1:
An estate agent receives a pre-auction bid from an intending purchaser. The bid is just below the reserve price. A later bid arrives, and is exactly the same as the reserve price. The estate agent falsely tells both intending purchasers that there is “another offer on the table” and that this offer exceeds theirs. If the deception results in a purchaser paying more for the property than would have been the case in the absence of the deception, Section 82 of the CA Act has been breached, and the estate agent is liable to a penalty of 5 years imprisonment.
Example 2:
The estate agent receives a bid from an intending purchaser at auction. The bid is below the reserve price. A bid is made by a competing purchaser, and is exactly the same as the reserve price. The estate agent falsely tells both intending purchasers that there is “another bid on the mobile phone for $5,000 more than the last bid”. If the deception results in a purchaser paying more for the property than would have been the case in the absence of the deception, Section 82 of the CA Act has been breached, and Section 47 of the SL Act has also been breached.
The estate agent in example 1 must be prosecuted under the CA Act, while the estate agent in example 2 may be prosecuted under the less punitive provisions of the SL Act.
The Regulator’s Dilemma
At present the term “Dummy Bidding” appears to be confined to situations where deceptive practices are conducted in public, leaving less apparent forms of deception to be dealt with under Section 82 of the CA Act.
Both offences are of a criminal nature, and so the evidentiary requirements are the same (i.e. rules of evidence, proof beyond reasonable doubt etc.).
It has now been recognised that there is some inconsistency in approach when dealing with deceptive practices, and that uniformity is desirable.
The regulators have chosen to ignore the reasons why deception is practised, namely the problem of estate agent control over the sale process; and have tended to focus merely on the symptoms of the problem.
Evidentiary Problems
Dummy bidding deception is still in wide use. It takes various forms, and in one extreme case an estate agent is said to have engaged actors to perform “street theatre” in an effort to deceive purchasers (see our website atwww.lawyersconveyancing.com.au/real-estate-news/latest-deception/)
The problem with real estate deception is that the likelihood of detection and discovery is very low. The standard of proof is the criminal standard of “beyond reasonable doubt”, and no-one other than the experienced police investigator has the power or the expertise to gather sufficient admissible evidence to gain a conviction.
Anecdote:
A vendor telephoned our office for advice on a dummy bidding proposal. His estate agent had asked him to have a trusted friend attend the auction in order to “create some competition” and the vendor wanted to know his legal position. We explained that dummy bidding is a criminal offence. We also explained that he would be a party to the offence if he contributed. We offered to investigate the matter by making contact with the estate agent. The caller explained that he “could not afford to get the agent off-side”. The agent could simply deny everything, and he was tied to her by an Exclusive Sale Authority. The agent could ruin the sale if she wanted to, and the vendor was worried about this.
What Drives Deception In Real Estate?
The driving force behind real estate deception is not a desire to achieve the best result for the client. Rather, it is the desire of the estate agent to maximise profits and to minimise costs.
What makes deception possible is the opportunity to use it, and the ease with which it is disguised, and then covered up.
This combination of incentive and opportunity creates the incubator for deceptive conduct. Add the fierce competitive forces at work in the real estate industry, and the recipe for the institutionalised practice of deception is complete.
It is submitted that a movement from a commission remuneration model to a fixed fee model is a matter for market forces. The most simple and appropriate approach is to deal with the overreaching of the estate agent’s function.
What Is The Function Of The Estate Agent?
There appears to be a great deal of confusion about the function of the estate agent. Our own dealings with Consumer Affairs Victoria (CAV) have revealed that neither government nor the regulating authorities have a proper understanding of the true function of the estate agent.
The estate agent’s function is to introduce a purchaser to the vendor’s property, and nothing more.
If estate agents could collect payment on the basis of a “spotter’s fee” for formally introducing an intending purchaser to the vendor, they would take no interest whatsoever in the negotiating of terms and conditions, the execution of contracts, or the possibility of a failed sale.
It is not, nor has it ever been, the function of the estate agent to deal with such matters. It is up to the parties themselves, with or without legal representation, to formulate the terms and conditions of the sale, and to conclude the sale.
If either party needs advice regarding the financial viability of the sale, or legal advice, they will consult accountants or lawyers. If a valuation is required a professional and accredited valuer will be consulted. Professional building inspectors and pest inspectors are consulted if necessary.
Consider the situation where a property owner is asked by a stranger if she is prepared to sell her property. Will the parties seek to engage an estate agent? Estate agents’ services are only considered by those who are seeking to be introduced. The true function of the estate agent is that of an “introduction agent”.
It is not the function of the estate agent to become involved in any way in the sale transaction, as these functions are properly the functions of other professionals.
Why Do Estate Agents Become Involved In The Sale Process?
The only reason an estate agent becomes involved in the sale process is in order to protect his or her interests. This is because the estate agent is actually a third party to the transaction.
The structure of the estate agent’s remuneration is the problem. A 3% commission, payable to an estate agent through operation of the agency contract between the estate agent and the vendor client (Exclusive Sale Authority) has the effect of making the estate agent a 3% shareholder in the client’s property for the currency of the contract.
Of course, the estate agent will not realise this share in the property unless and until a sale eventuates. Time is critical to the estate agent, as the vendor client may not renew the contract when it expires. Thus, the estate agent is under immediate and relentless pressure to secure a sale within the limited time available.
The anticipation of commission gives the estate agent an interest in the outcome of any real estate sale transaction, and this gives rise to a serious conflict of interests. When the interests of the estate agent conflict with those of the true parties to the transaction, the likelihood of improper behaviour is greatly increased.
Estate agents involve themselves in the sale process for one reason only – to influence the process in order to bring about a sale, or to limit the likelihood of sale’s failure, in order to win a commission.
How Do Estate Agents Justify Their Involvement In The Sale Process
Estate agents will argue that a number of key functions belong to them exclusively, or that estate agents should be entitled to share the functions of other professionals, such as valuers and lawyers. However, when these arguments are analysed, they inevitably involve self interest. Let us examine some examples of these arguments:
The estate agent represents the vendor
As stated above, the estate agent has an interest in the outcome of a real estate transaction, and is therefore an interested party. The estate agent represents his own interests in the transaction, not those of the vendor.
While the interests of the vendor and the estate agent may coincide to some extent, it is the vendor’s lawyer who truly represents the vendor. In the event that the estate agent acts contrary to the interests of the vendor, it will be the responsibility of the vendor’s lawyer to properly advise the vendor of her rights and remedies.
The estate agent negotiates the transaction
The estate agent cannot negotiate on behalf of the vendor if the estate agent does not represent the vendor.
Furthermore, the estate agent cannot properly negotiate on behalf of the vendor when doing so from a position of conflicting interests.
It should be noted that so-called “negotiations” conducted by an estate agent are unique, insofar as the estate agent usually purports to act for both the purchaser and the vendor.
The estate agent acts for the vendor in delivering to the purchaser the proposed contract of sale. The estate agent then acts for the purchaser in formulating the purchaser’s offer, often by drafting special conditions (using precedents issued by the REIV) and advising the purchaser as to their meaning and effect, and then submitting the purchaser’s offer to the vendor.
The estate agent then receives the purchaser’s offer on behalf of the vendor, explains the meaning and effect of its contents to the vendor, and invites the vendor to accept the offer. (It is highly unlikely that an estate agent would advise a vendor against accepting an offer, if doing so could result in the loss of a commission.)
All “negotiating” is done with a view to securing the estate agent’s goal – a commission-producing sale.
If any issues arise as between the vendor and the purchaser post-contract, the parties are referred to their respective lawyers, unless the matter impacts on the commission, in which case the estate agent will strive to remain involved (see “The estate agent keeps things on track” below).
The estate agent assists unrepresented parties
If the estate agent represents the vendor when the vendor is otherwise unrepresented, does the estate agent accept responsibility for properly advising the vendor regarding her rights and responsibilities concerning the Section 32 Vendor Statement? If not, why not? Who does?
The same questions can be asked in relation to a sale contract, particularly where owner-builder rules apply.
Estate agents are never keen to take responsibility for the preparation of the Section 32 Vendor’s Statement, even though they have as much right as conveyancers to do so. This is because the estate agent has no interest in taking responsibility for the sale. The estate agents want only to control the sale.
Only where a solicitor or conveyancer is carrying responsibility for the legal documents, legal advice, and legal welfare of the client, will the estate agent seek to take control of the transaction on behalf of the vendor.
Similarly, the estate agent will quite readily offer representation to an unrepresented purchaser in order to secure a sale. If criticised for taking advantage of the purchaser or improperly advising the purchaser, the estate agent will state that he acts for the vendor, and this it is a matter of caveat emptor as far as the purchaser is concerned. However, the estate agent’s conflicting self-interests almost inevitably steer the transaction.
Estate agents argue that they need the ability to “close a sale” on weekends, when lawyers are usually unavailable to the parties. However, “cooling off” options for purchasers make it almost impossible for an estate agent to effect an unconditional sale at any time, including weekends.
The estate agent “keeps things on track”
Estate agents regularly involve themselves in matters post-contract. The most common involvement of the estate agent post-contract relates to the Section 27 Deposit Release Statement. The estate agent will contact the vendor’s lawyer to ensure that the Section 27 has been delivered to the purchaser, or the agent will attend to this personally.
The estate agent will then contact the purchaser’s lawyer to ensure that the purchaser will execute the Section 27 without delay.
Why does the estate agent become involved in such matters? The answer becomes apparent when one realises that the estate agent is entitled to deduct the commission from the deposit.
Similarly, if problems arise with the transaction between sale and settlement, the estate agent is rarely content to allow the matter to be dealt with by the parties’ lawyers. It is our experience that estate agents make every effort to “save” a sale, even when doing so is contrary to the interests of the parties. In a number of extreme examples we have seen estate agents make direct contact with the parties in order to influence the instructions they give to their lawyers.
The estate agent involves himself in such matters because he has a financial interest in the outcome of the transaction.
Conclusion
These are just a few examples of arguments advanced by estate agents in order to justify their involvement in real estate sale transactions. Undoubtedly, there are others, but they too will be based on estate agent self-interest.
If the element of estate agent self-interest could be eliminated from the real estate transaction, would estate agents involve themselves in the transaction beyond simply introducing a purchaser to a vendor client’s property? The answer is a resounding “NO!”Having studied the general problem of estate agent involvement in the sale process, let us now examine the specific issue of the so-called “Private Auction”.
How Are Real Estate Sales Transacted Without An Estate Agent?
Where two parties are already known to each other the following process is usually followed. If the parties are unrepresented, the process may be less formal, but it will be similar:
1. A verbal understanding is reached, but is not binding on either party.
2. The parties decide to formalise the arrangement, and have a formal written contract prepared. Generally, the vendor will commence the formal negotiations by having a draft contract prepared on his terms, and usually with advice and assistance from a legal practitioner.
3. The purchaser is provided with a copy of the proposed contract, and advised to seek independent legal advice. (It is regarded as improper for a lawyer to advise both parties.)
4. The purchaser may use the contract provided, or may amend the contract provided, or may substitute the contract with one prepared by her lawyer.
5. The purchaser’s offer is submitted through the vendor’s legal representative.
6. The vendor considers the offer, with assistance and advice from his lawyer. The vendor may accept the offer by counter-signing, and communicating acceptance to the purchaser’s lawyer. Alternatively, the vendor may reject the purchaser’s offer, and make a counter-offer. The vendor may amend the contract submitted by the purchaser or prepare a fresh contract. The contract is executed by the vendor, and submitted to the purchaser through the purchaser’s lawyer as a formal counter-offer.
7. The vendor’s counter-offer may be accepted or rejected by the vendor.
8. The process continues according to the timeframe of the parties.
When described in written form the above process appears rather complicated, but in practice it is quick and transparent.
The most important comment to be made about this procedure is that neither of the parties are pressured, or otherwise influenced by, a third interested party.
Other observations to be made include:
- The parties retain complete control of their part of the transaction;
- The parties have access to sound and impartial legal advice and assistance;
- All decisions regarding due diligence, terms and conditions, and timeframes, are made by the parties;
- Neither party will be pressured to proceed with the sale by any third interested party;
- The opportunity for deception is minimised by the transparency of the process and the likelihood that parties will be advised if their conduct may be illegal;
- The parties will be advised to seek advice on crucial matters from professionals, as opposed to an interested third party (Accredited Valuer – valuations and opinions on price, Lawyer – legal advice and preparation of legal documents, Building Inspector – advice on structural integrity of buildings, Accountant – advice on viability of purchase and financing of the purchase);
- The parties will not be contacted directly (i.e. other than through their own lawyers) by an interested third party, badgering about such matters as deposit release, quick signing of contracts, finance approval or their reasons in the event of a change of heart.
A Simple Solution To A Complex Problem
The simple solution to the problem is to take a zero-tolerance approach to the involvement of estate agents in the sale process.
At this stage it is important to again emphasise the fact that estate agents should not play a role in the sale process at all, and that their doing so involves an unacceptable conflict of interests.
SUBMISSIONS AND RECOMMENDATIONS
Submission 1
We submit that the role of the estate agent is complete when the parties have indicated an interest in submitting an offer. At this stage, the parties should be referred to their lawyers.
Recommendation:
The sale negotiation process, the formulation and drafting of terms and conditions, and the execution of contracts should be matters for the parties and their legal representatives only.
Submission 2
We submit that unrepresented a purchasers are most at risk of estate agent deception at the sale negotiation stage.
Recommendation:
Estate agents should serve written notice on an unrepresented purchaser, advising of the estate agent’s interest in the outcome of negotiations, and urging the purchaser to seek independent legal advice.
Recommendation:
Where a purchaser does not wish to obtain legal advice or assistance, and requests assistance from the estate agent, the estate agent should serve a completed copy of the proposed contract of sale on the purchaser, and advise the purchaser that 3 clear business days must elapse before a formal and binding offer can be accepted.
The effect of this would be as follows:
- An estate agent can no longer prepare a contract on behalf of a purchaser, and then receive it on behalf of the vendor in one sitting;
- The problem of conflicting interests is minimised, as the agent’s interests and those of the vendor are better served by encouraging the purchaser to seek legal advice;
- The purchaser has 3 days to properly consider the contract in its final form;
- The opportunity for pressure tactics and deception is minimised by giving the purchaser “breathing space”;
Recommendation:
If pre-contract cooling off is introduced, the cooling off provisions contained in Section 31 of the SL Act should be amended, so that they apply only where an estate agent is NOT involved in the transaction.
Submission 3
We submit that vendors are at risk of estate agent deception when the estate agent purports to advise, or to otherwise represent, the vendor at the sale negotiation stage.
Recommendation:
The estate agent, when presenting a purchaser’s offer to the vendor, should not in any way advise or otherwise encourage the vendor to accept or reject the offer, other than to recommend to that the vendor should seek legal advice from the vendor’s legal representative.
Submission 4
We submit that the practice of estate agents involving themselves in matters post-contract is highly improper and contrary to the interests of consumers and those whose function it is to protect them.
Recommendation:
Where parties to a real estate transaction are represented, the estate agent must never make direct contact with the parties, other than where such contact is instigated by the parties themselves. If so contacted, the estate agent must first advise the party to deal through their legal representative. All contact initiated by the estate agent must be through the parties’ legal representatives.
Submission 5
We submit that the “Dummy Bidding” provisions of the SA Act have had little effect, other than to reduce the penalty for criminal deception and to draw some attention to the fact that deception in real estate transactions is illegal.
Recommendation:
The “Dummy Bidding” provisions of the SA Act should be repealed, allowing regulators to charge offenders with the more serious offence of OFBD.
Recommendation:
New legislation should be introduced to formalise the limited role of the estate agent, and to introduce the consumer protection measures raised in this paper.
Recommendation:
A public awareness campaign should be undertaken, to educate consumers, estate agents, and other real estate professionals on the proper procedures to be followed in real estate sale transactions.
